Dollar Diplomacy

Photo by: Tomislav Forgo

Eugene P. Trani

In his final message to Congress on 3 December 1912, President William
Howard Taft looked back at the foreign policy followed by the United
States during his administration and noted: "The diplomacy of the
present administration has sought to respond to modern ideas of commercial
intercourse. This policy has been characterized as substituting dollars
for bullets. It is one that appeals alike to idealistic humanitarian
sentiments, to the dictates of sound policy and strategy, and to
legitimate commercial aims."

Taft's remarks gave formal definition to the term "dollar
diplomacy," a phrase synonymous with the diplomacy his
administration pursued between 1909 and 1913. During those years the goal
of diplomacy was to make the United States a commercial and financial
world power. It was a narrowly constructed view of foreign relations,
arising in great part out of the natural alliances between the corporate
lawyers who came to people Taft's administration and the bankers
and businesses that were their clients. Thus, the Taft administration
concentrated on assisting American businessmen in the protection and
expansion of investment and trade, especially in Latin America and the Far
East.

The idea of protecting American commercial interests around the world was
not new and had been part of the diplomacy of the United States since its
earliest days. Efforts to trade with British and Spanish colonies in the
Western Hemisphere, defense of the rights of neutrals to trade in wartime,
and support of the most-favored-nation concept were all predecessors of
dollar diplomacy. Yet dollar diplomacy was the subject of much controversy
during the Taft administration and in the years that followed.

Much of the contemporary controversy over dollar diplomacy stemmed from
the fact that Taft, the handpicked successor of Theodore Roosevelt, had
embarked on a policy that differed from the one Roosevelt had followed.
Roosevelt was an expansionist and had supported the American move into
world affairs. For a variety of reasons, Roosevelt believed expansion
necessary for the United States, with benefits for the rest of the world.
He viewed foreign affairs in strategic terms, with Europe as the center of
world power. He felt an affinity for Britain and based much of his
diplomacy on cooperation between Washington and London. To be sure,
Roosevelt supported the expansion of American business throughout the
world, but he was much more concerned with the balance of power and
improving the Anglo-American relationship. As a result, Roosevelt mediated
the Russo-Japanese War (1904–1905) and the conflict between France
and Germany over Morocco in 1906.

Taft came to office with a different view. Ever the lawyer, he viewed
foreign policy in terms of legal institutions. He thus came to support
arbitration treaties. He had differences with Roosevelt over Europe,
feeling that the United States had little or no interest in events there.
Taft kept the United States out of the second Moroccan crisis in 1911,
and, while supporting mediation, he was not willing to mediate the
Italo-Turkish War (1911) nor the first Balkan War the following year. Taft
believed that the most important relations with Europe occurred in
developing nations where the United States and Europe shared interests.

Taft's view of the role of American business in foreign policy also
differed from Roosevelt's. Taft long had been concerned with
foreign trade. He recognized that by 1909 the United States was producing
more goods than Americans could consume and therefore had to increase
exports. It was perhaps symbolic that during the Taft administration, in
1910 to be exact, that the United States began to export more manufactured
goods than raw materials, changing the focus of trade from industrial
nations in need of raw materials to lesser developed countries that
required finished products. In this regard the developing areas of Latin
America and East Asia seemed particularly
important. A concentration on economic opportunities in Latin America and
East Asia, especially China, would have many benefits. Such a policy would
help the American economy by solving the problem of overproduction. It
would benefit recipient nations, bringing economic progress, which in turn
would mean political stability; and stability would guarantee American
strategic interests in underdeveloped areas. It was not surprising that in
Taft's first annual message (7 December 1909) he stated:
"To-day, more than ever before, American capital is seeking
investment in foreign countries, and American products are more and more
generally seeking foreign markets."

While Taft had ideas as to the diplomacy the United States should follow,
he had no interest in serving as his own secretary of state, further
distinguishing his administration from Roosevelt's. The man whom
Taft chose to carry out his foreign policy, after refusals by Elihu Root
and Henry Cabot Lodge, was Philander C. Knox, a wealthy conservative
Pennsylvania lawyer then in the Senate. Knox had been attorney general
between 1901 and 1904; and this fact, in the president's view, more
than made up for his lack of experience in foreign affairs, since Taft
wanted lawyers in his cabinet. Knox had been what is now known as a
corporation lawyer, the Carnegie Steel Corporation being one of his
clients. He was thus sympathetic to big business.

Knox shared Taft's views concerning the goal of American
diplomacy—protection and expansion of economic interests. A State
Department memorandum of 6 October 1909 pointed out that all developed
countries were seeking trade and noted that trade was essential to
American prosperity. There could be no more important task than expanded
investment and trade. Diplomacy had to support American financiers and
businessmen by finding opportunities abroad. The State Department appeared
to anticipate the activities of the Bureau of Foreign and Domestic
Commerce in the 1920s, when Herbert Hoover was secretary of commerce,
although Hoover strenuously objected to the concept of dollar diplomacy,
making it a priority following his election to the presidency to eliminate
its effects, particularly in Latin America. But locating commercial
opportunities abroad was not enough for Knox and Taft. As the 1909
memorandum indicated, the United States would insist that Americans
compete with Europeans in the developing countries by buying bonds,
floating loans, building railroads, and establishing banks.

So it was that the State Department during the Taft years turned to dollar
diplomacy. The policy gained support throughout the diplomatic corps, a
fact that was especially important as Knox concentrated on policy and
allowed subordinates to run day-to-day operations. Francis M. Huntington
Wilson, first assistant secretary of state, presided over the daily
activities of the State Department and carried out a reorganization of the
department into geographical bureaus. Huntington Wilson, Willard D.
Straight, and Thomas C. Dawson, the latter two the initial heads of the
Division of Far Eastern Affairs and the newly created Latin American
Division, respectively, all shared the views of Taft and Knox on trade and
investment.

When the administration talked about dollar diplomacy in Latin America, it
was almost always referring to the Caribbean, which had strategic
implications because of the soon-to-be-completed Panama Canal. Concerned
over the general instability of the Central American governments, Taft and
Knox set a goal of stable governments and prevention of financial
collapse. Fiscal intervention would make military intervention
unnecessary. As Knox told an audience at the University of Pennsylvania on
15 June 1910: "True stability is best established not by military,
but by economic and social forces…. The problem of good government
is inextricably interwoven with that of economic prosperity and sound
finance; financial stability contributes perhaps more than any other one
factor to political stability."

Such statements did not mean that Taft and Knox were unwilling to use
military power in the Caribbean. They did use it. They thought that fiscal
control would lessen the need for intervention. They believed that the
United States and nations of the Caribbean would both benefit. For the
United States, an increase in trade, more profitable investments, and a
secure Panama Canal would result. For the local inhabitants, the benefits
would be peace, prosperity, and improved social conditions.

Taft and Knox believed that the way to control the finances of the
Caribbean countries was to take over customhouses, following the example
of the Roosevelt administration in the Dominican Republic. According to
the Taft-Knox doctrine, it was important to get the Caribbean nations to
repay European debts by means of loans from American businessmen or at
least from multinational groups in which Americans participated. In
Nicaragua, Honduras, Guatemala, and
Haiti, the United States pushed refunding schemes. The State Department
believed that these sorts of reforms would end political instability in
the Caribbean.

Nicaragua proved the classic case of dollar diplomacy in the Caribbean.
While the American economic interest in Nicaragua was small, the country
had been an alternate route for the trans-Isthmian canal. The United
States was sensitive to activities in Nicaragua. The longtime dictator
José Santos Zelaya had never been popular in Washington and was
seen as the cause of much instability in Central America, the result of
his efforts to dominate the area. When Knox took control of the Department
of State, he ordered withdrawal of the chargé d'affaires
from Nicaragua, began to press private business claims against the Zelaya
government, and sought, albeit unsuccessfully, to discourage a
Franco-British consortium from making a loan. In cooperation with Mexico,
the United States also sent warships to stop Zelaya from filibustering in
Central America.

In October 1909 the situation became complex with the outbreak of civil
war in Nicaragua. Insurgency centered on the eastern coast in Bluefields,
a city dominated by foreign businessmen and planters. These foreigners and
conservative politicians in Nicaragua followed the lead of General Juan J.
Estrada. Foreign money, some of it American, bankrolled the
revolutionaries. While declaring itself neutral, there was little question
as to which side the U.S. government supported. Formal neutrality
disappeared when Zelaya executed two Americans captured while fighting
with the rebels. The United States broke off relations, asserting that the
revolutionaries represented "the ideals and the will of a majority
of the Nicaraguan people more faithfully than does the Government of
President Zelaya."

Washington made known that Zelaya's resignation in late 1909 was
not enough. Huntington Wilson pushed for expulsion of the liberal party
from power, hoping the rebels would take control. U.S. forces landed at
Bluefields to make sure fighting did not damage American interests.
Successes followed for the insurgents, and by the end of August 1910 they
had taken the capital, Managua. The United States expected fiscal reform
in Nicaragua, and refused to recognize the new government until it had
agreed to American control of the customhouses and to the refunding of the
debt owed to British bankers by means of a loan from American financiers.
Dawson went to Nicaragua to negotiate the terms of recognition.

This did not end the difficulties, for the American demands were
unpopular. The United States went ahead with its financial program, even
though the Senate delayed action on the treaty (known as the
Knox-Castrillo Convention) worked out between Washington and Managua in
June 1911, which called for refunding of Nicaragua's internal and
external debts and administration of the customs by a collector approved
by American officials. While the Senate debated, bankers went ahead with
the rehabilitation of Nicaraguan finances, making a loan with the national
railroad and the national bank as collateral. American citizens also began
to collect Nicaraguan customs and to serve on a mixed claims commission,
all in anticipation of Senate action. Much to the distress of Taft and
Knox, the treaty died in a Senate committee in May 1912, along with a
similar treaty with Honduras.

Another revolution broke out in Nicaragua in July 1912, and this also
brought American intervention. Approximately 2,700 marines landed to
protect U.S. citizens and property and to suppress the revolution, which
was over by early October. Although the majority of the marines was soon
withdrawn, a legation guard remained as a symbol of intervention until
1925. The Taft administration went out of office in March 1913, convinced
that the policy it had followed in Nicaragua was correct. Intervention had
proved necessary, the administration admitted, but it was only for a short
time and continued fiscal intervention would make further military
intervention unlikely.

The Taft-Knox policy toward Nicaragua, and for that matter toward the rest
of Central America, was unquestionably offensive to Latin Americans. Even
a goodwill visit through the Caribbean by Knox could not overcome
suspicions. Knox said the United States did not covet an inch of Latin
territory, but such utterances were not accepted south of the Rio Grande.

In the years after 1912, political leaders in both Latin America and the
United States attacked Taft's policy toward Central America. Elihu
Root believed that dollar diplomacy rekindled Latin fears and suspicions
of the United States that he had worked so hard to overcome while
secretary of state from 1905 to 1909. In 1913, President Woodrow Wilson
made clear that he would not support special interests trying to gain
advantages in Latin America. The Bryan-Chamorro Treaty, finally approved
in 1916, contained provisions similar to the second treaty
Knox had worked out with President Adolfo Díaz of Nicaragua in
early 1913. Even so, Wilson and Secretary of State William Jennings Bryan
were much less interested in protecting U.S. businesses in Latin America
than Taft and Knox. Dollar diplomacy as a policy was at an end in Latin
America. Criticism of the policy continued. Like President Hoover,
President Franklin D. Roosevelt renounced dollar diplomacy. Both
presidents attempted to construct what became known as the Good Neighbor
Policy in dealing with Latin America, and the concept of the Taft-Knox
doctrine was all but dead by the time of the Hoover administration. In the
long run, of course, American businessmen did increase trade and
investment in Latin America, but it was World War I, not dollar diplomacy,
that decreased European economic interests in that part of the world.

If the results of dollar diplomacy were meager in Latin America, where the
United States was the dominant power, they were a disaster in China, the
target for the Taft-Knox policy in East Asia. Of course, the situation in
the Far East was difficult. In the late nineteenth century and the first
decade of the twentieth century much change had taken place. With
victories over China in 1895 and Russia in 1905, Japan had become the
major power in the Far East. Theodore Roosevelt had supported
Japan's new prominence in East Asia. He decided that Japan did not
threaten American interests there. He saw the Japanese as a barrier to
Russian expansion; a preserver of the balance of power in East Asia;
protector of the Open Door; and stabilizer of China, a nation for which he
had little respect. Roosevelt had backed Japan in its war with Russia and
in 1905 had mediated the peace.

Roosevelt had hoped to arrange a balance of power between Russia and Japan
after the war, but the Japanese victory was so decisive and other events
in Japanese-American relations so important that he gave up on the Open
Door in China, especially in Manchuria, which the Japanese began to close
after 1905. Because of the need to protect the Philippines, which
Roosevelt believed was the "heel of Achilles" of the United
States, and the war scare that resulted from the Japanese immigration
crisis, Roosevelt accepted Japanese expansion on the mainland of Asia. He
came to feel that the Open Door was not worth war with Japan. The United
States should do what it could to preserve interests in China, but should
recognize Japan as the dominant power on the Asian mainland. In short, he
gave a green light to Japanese expansion. One of the best expressions of
this belief appeared in a letter to Knox on 8 February 1909, shortly
before Roosevelt left office. He noted that Japanese-American relations
were of "great and permanent importance." While immigration
to the United States had to stop, the United States should "show
all possible courtesy and consideration." The Taft administration
had to understand that "Japan is vitally interested in China and on
the Asiatic mainland." Since the Pacific coast of the United States
was defenseless and "we have no army to hold or reconquer the
Philippines and Hawaii," the country had to avoid war. Roosevelt
felt that American interests in China were insignificant in American Far
Eastern policy.

Even as his administration came to an end, forces were at work that would
change Roosevelt's policy in East Asia. In 1908 Root had
established the State Department's first geographic unit, the
Division of Far Eastern Affairs. Headed by Willard Straight, the division
opposed Japanese expansion in China, and this opposition was to dominate
the division in the years between 1909 and 1941.

Roosevelt's East Asian policy thus was reversed. With urging from
the State Department and because of a combination of
motives—economic expansion, suspicion of Japan, faith in the future
of China—the Taft administration decided to challenge Japan in
China. During the Taft years, the Open Door Notes, which had frequently
changed in meaning after 1900, assumed new importance in the Far Eastern
policy of the United States.

In Far Eastern policy, department officials now proved important. Taft and
Knox did not need convincing. Both believed China was the country of the
future in the Far East and that if the United States desired influence
with that emerging nation it had to increase its financial interests
there. If the president and secretary of state had any doubts about such
policy, they were overcome by State Department advice. Huntington Wilson,
who had served in Tokyo, and Straight, who had been consul in Mukden,
Manchuria, were both hostile to Japanese ambitions in China. They had
tried unsuccessfully in the last days of the Roosevelt administration to
enlarge the Open Door to include investment and trade. With Taft and Knox
they had more success.

The Taft administration came to see investment in railway development and
loans to the Chinese government as the means to increase influence in
China. Knox demanded that American financiers be given the opportunity to
join the

British, French, and German consortium in lending money to China to
finance railroad construction in the Yangtze Valley, the so-called Hukuang
Railway loan. When the demand met with European hostility, Taft appealed
to the Chinese head of state: "I have an intense personal interest
in making the use of American capital in the development of China an
instrument for the promotion of the welfare of China, and an increase in
her material prosperity without entanglements or creating embarrassments
affecting the growth of her independent political power and the
preservation of her territorial integrity." The State Department
persuaded a group of investors to assume part of the loan. Knox grudgingly
got his way, but only at the price of irritation in Britain, France, and
Germany. In the long run, this project was a failure.

From the Hukuang loan the State Department turned to Manchuria. The result
was the Knox neutralization policy, which more than any other proposal
epitomized dollar diplomacy in China. In the fall of 1909, Knox proposed
that American, Japanese, and European bankers lend China enough money to
repurchase the Chinese Eastern Railroad, held by Russia, and the South
Manchurian Railroad, in the possession of Japan. Manchuria would be
neutralized and open to all commercial activities. Washington feared that
southern Manchuria was being closed to non-Japanese influences. Knox
realized that the Japanese would be difficult, but he thought the proposal
would be supported in Europe. Britain, France, and Germany eventually
decided to defer to the wishes of Japan and Russia, and in January 1910
the latter two nations rejected the plan. Only the Chinese showed
interest, but that soon turned to concern when Russia and Japan agreed in
July to cooperate in guaranteeing the status quo in Manchuria. Knox had
only succeeded in driving the former enemies into a virtual alliance to
prevent American interference in Manchuria. A companion proposal by
Straight, who had left the State Department to head the American
consortium planning a railroad that ran parallel to portions of the South
Manchuria line, met a similar fate.

By the fall of 1910, Knox recognized defeat in his railroad plans for
Manchuria. Throughout the rest of his term as secretary of state, he
continued to work for increased American involvement in China, but through
plans that did not contest the Japanese and Russians in Manchuria. He
became involved in plans for a multinational currency reform loan, but the
Chinese revolution that began in 1911 put an end to that scheme. The
government that overthrew the Manchu then negotiated with a six-power
consortium for a reorganization loan. Negotiations dragged on until the
Taft administration left office.

Dollar diplomacy in China stimulated international controversy. The
Taft-Knox policy succeeded in causing distress, irritation, and even anger
in London, Paris, Berlin, St. Petersburg, and Tokyo. Knox's clumsy
attempts to help China only weakened the empire, since Japan and Russia
agreed on a policy. The policy aroused controversy in the United States,
where bankers were reluctant to participate. Roosevelt opposed the policy,
writing to Taft in late 1910 that the Open Door in China could only be
maintained by general diplomatic agreement. He noted that "as has
been proved by the whole history of Manchuria, alike under Russia and
under Japan, the 'Open Door' policy, as a matter of fact,
completely disappears as soon as a powerful nation determines to disregard
it, and is willing to run the risk of war." Roosevelt was convinced
that Japan was one such nation, and that the United States ought not to
try to bluff the Japanese on the mainland of Asia, especially since
Americans would never agree to fight a war there.

Wilson later withdrew government support from American investors planning
the reorganization loan, charging that the loan violated Chinese
sovereignty and threatened China with intervention. The American investors
backed out of the loan, and the last of the dollar diplomacy schemes came
to an end. In the long run, Wilson reversed his position, approving
participation in a consortium in 1918. But Japan remained the dominant
power in China until World War II, and Roosevelt's policy seemed
valid in retrospect. Taft and Knox failed in their goal—to dislodge
Japan from the Asian mainland.

There were other areas to which the Taft administration tried to apply
dollar diplomacy, such as in Turkey. Breaking sharply with the traditional
American policy toward the Ottoman Empire, which centered on protecting
the rights of American citizens, the Taft administration attempted to
share in the mining, irrigation, and railroad concessions then being
negotiated by the Turkish government. Taft hoped that the United States
would obtain a larger share of the commerce of the Near East. He was to be
disappointed. The United States found the European powers too entrenched,
and dollar diplomacy failed in Turkey. But Central America and China were
the most spectacular examples of the doctrine.

The controversy over dollar diplomacy lasted well after 1913. Generally
recognized by students of international relations as a failure, dollar
diplomacy has engendered controversy concerning its motives and the people
responsible for carrying it out. Some writers have argued that the policy
was primarily economic, while others have contended that it was dominated
by strategy, especially in Latin America. Others have defended the desire
of the Taft administration to "do good" in Latin America and
Asia, in some cases noting that its failure was probably owing more to
diplomatic bumbling than imperialistic urges. The most recent writings of
scholars have additionally argued that the logic of imperialism undermined
the logic of "dollars for bullets," which ended up relying
on military intervention to protect the interests of businesses and
individual investors. In effect, dollar diplomacy created, rather than
mitigated against, havoc. The most balanced account of dollar diplomacy,
that of the historians Walter and Marie Scholes, has combined these
motives and also noted that Taft's diplomacy anticipated U.S.
foreign policy after World War II. Taft and Knox chose private capital as
their instrument, whereas President Harry S. Truman used public capital.
In both instances, the most important consideration was preservation of
vital American interests abroad by helping underdeveloped countries
establish viable governments and integrating them into the twentieth
century.

Debate as to responsibility for the policy has taken two directions.
Historians have argued over the roles of Taft, Knox, the State Department,
and American businessmen. Straight has especially been the subject of
debate. One account has convincingly argued that Straight's role in
the Far East has been exaggerated. The most reasonable conclusion would
seem that there was a common purpose among the advocates of dollar
diplomacy.

Another direction of the debate over dollar diplomacy has been whether it
was only one aspect of a continuous policy followed in the twentieth
century by the United States—to expand American economic
opportunities abroad. It is clear that Taft's predecessor, Theodore
Roosevelt, and his successor, Woodrow Wilson, as well as the rest of the
American leaders in the twentieth century, supported the expansion of
American business, up to and including the Clinton administration's
crafting of the NAFTA agreement and approaching foreign relations with
China on economic, rather than human rights, terms, to the dismay of many
Americans and their congressional representatives. Indeed, the term
"dollar diplomacy" was revived by the media to describe the
thrust of U.S. foreign relations during the 1990s. There has, however,
been no extensive scholarly investigation into the validity of using the
policy of the Taft administration to define the economic foreign policy
being carried out by the United States at the beginning of the
twenty-first century. No president, other than Taft, has made such a
policy the principal goal of diplomacy. As a result, the term
"dollar diplomacy" remains synonymous with the diplomacy of
1909 to 1913.

BIBLIOGRAPHY

Bemis, Samuel Flagg.
The Latin American Policy of the United States.
New York, 1943. Although dated, the work is still valuable.

Esthus, Raymond A. "The Changing Concept of the Open Door,
1899–1910."
Mississippi Valley Historical Review
46 (1959). Important to see how the Taft administration tried to change
the meaning of the Open Door policy.

Gardner, Lloyd C. "American Foreign Policy 1900–1921: A
Second Look at the Realist Critique of American Diplomacy." In
Barton J. Bernstein, ed.
Towards a New Past: Dissenting Essays in American History.
New York, 1968. Argues the importance of economic motives.

Hunt, Michael H.
Frontier Defense and the Open Door: Manchuria in Chinese-American
Relations, 1895–1911.
New Haven, Conn., 1973. Disputes Straight's importance in the
formulation of America's East Asian policy.

Kahn, Helen Dodson. "Willard D. Straight and the Great Game of
Empire." In Frank J. Merli and Theodore A. Wilson, eds.
Makers of American Diplomacy: From Theodore Roosevelt to Henry
Kissinger.
New York, 1974. Portrays Straight as architect of dollar diplomacy in
East Asia.

Minger, Ralph E.
William Howard Taft and United States Foreign Policy: The
Apprenticeship Years, 1900–1908.
Urbana, Ill., 1975. Gives extensive treatment to Taft's
involvement in foreign affairs before he became president.

Munro, Dana G.
Intervention and Dollar Diplomacy in the Caribbean, 1900–1921.
Princeton, N.J., 1964. Cites the importance of strategy as the
motivation of dollar diplomacy in the Caribbean, and is very
comprehensive.

Nearing, Scott, and Joseph Freeman.
Dollar Diplomacy: A Study in American Imperialism.
New York, 1966. A socialist view in an update of a 1926 work.

Rosenberg, Emily S.
Financial Missionaries to the World: The Politics and Culture of
Dollar Diplomacy, 1900–1930.
Cambridge, Mass., 1999. Goes beyond the defined period of
1909–1913.

Scholes, Walter V., and Marie V. Scholes.
The Foreign Policies of the Taft Administration.
Columbia, Mo., 1970. The best study of the diplomacy followed by Taft.